California Won't Go Broke, Says Merrill Analyst

John Carney

May 13, 2009, 9:52 AM

Fears of an imminent default on debt issued by California may be overstated, according to a Merrill Lynch analysts. The state is unlikely to run out of cash and go broke, Merrill muni strategist Phillip Fischer said in a note on May 11th.

We'd say that the market is probably also pricing in the possibility that Barney Frank will get his way and we'll have a federal backstop of all muni debt soon enough. Even without a formal backstop, we think it's unlikely that the Obama administration and a Democrat controlled Capitol Hill would let California default.

This is another way that we've broken the signalling function of the credit markets, which no longer provide clear indications of expected economic performance thanks to the numerous and varied government interventions.